2 firms to acquire Education Management

By Daniel Lovering, AP Business Writer | March 6, 2006

PITTSBURGH --Education Management Corp., an operator of for-profit universities and vocational schools, said Monday two investment firms will buy the company and take it private in a $3.4 billion deal intended to help it add programs and expand into new domestic and international markets.

Providence Equity Partners and Goldman Sachs Capital Partners will pay $43 per share in cash for the company, a premium of 16 percent to the company's share price Friday and 26 percent above the average closing price of the stock over the past 30 trading days.

"Private ownership will allow us to further respond to the changing needs of students," said John R. McKernan Jr., the company's chief executive. "It will allow us to accelerate our strategies to expand our traditional and online program offerings and also give us the opportunity to enter additional new geographical markets."

As a private company, Education Management will be able to make long-term investments that could incur short-term losses, which are "not always favored by public investors," he said in a conference call. "We just think it's going to be a lot easier to make those investments ... in a private setting."

The company plans to add academic programs and locations, and develop more flexible ways for students to take courses, such as online. It hopes to make inroads overseas with the help of Providence and Goldman Sachs, firms with global reach.

Education Management's board approved the transaction after reviewing "the range of strategic alternatives," but decided the terms offered by the investment firms "were superior to other offers and options available to the company," McKernan said, declining to elaborate.

The deal requires approval from shareholders, the Department of Education, accrediting agencies and state licensing boards. It is expected to be completed within the next several months, McKernan said.

The buyout of Education Management -- among the most successful of about a dozen publicly traded education companies and one with a particularly clean regulatory record -- caught some analysts off-guard.

Alexander Paris Jr., an analyst at Barrington Research, said it was "a bit of a surprise" given the company's strong performance since its initial public offering in 1996. Such buyouts are more typical of troubled companies or those with very low valuations, he said.

"While its enrollment growth has slowed in recent quarters, it's still pretty high," Paris said. "And they seemed to be doing everything right."

Last month, the company reported a second-quarter profit jump of 20 percent to $47.6 million, or 62 cents per share. The company cited increased enrollment and revenue, which rose 13 percent to $312.6 million.

Over the past decade, the company "was just ramping up, an industry coming out of nowhere to be something substantial," Paris said.

"The next 10 years is going to be things like online expansion, delivering the education over the Internet, international expansion -- buying schools and establishing a foothold in international markets like Asia, Latin America and Europe," he said. "It'll be to open new geographic locations within the United States."

Education Management operates 72 primary campus locations in 24 states and two Canadian provinces. It offers educational programs in art, education, business, information technology and electronics, among other fields.

Education Management's schools include a national network of 31 Art Institutes, campuses of Argosy University in 10 states, and four campuses of South University in the southeastern United States.